SSAs sowing the seeds of green pricing performance
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SSAs sowing the seeds of green pricing performance

The much sought after trend for green bonds to outperform conventional paper in secondary trading is now a reality, according to public sector borrowers — but perhaps only for those with enough dots on their green curves to provide a comparison.

But other SSAs are seeing pricing advantages for SRI primary issuance, if only in that they can shave basis points off the new issue premium needed for an equivalent conventional bond.

As has always been the case for the pioneering SSA green and social bond market, the latest trends in classification and impact reporting were also among the topics as GlobalCapital sat down with public sector issuers, investment bankers and investors in Amsterdam in early September.

Participants in the roundtable were:

Björn Bergstrand, head of sustainability, Kommuninvest

Hans Biemans, head of sustainable markets, ING

Arnold Fohler, head of debt capital markets, DZ Bank

Crispijn Kooijmans, head of public sector origination, Rabobank 

Jürgen Köstner, head of investor relations, KfW 

Arthur Leijgraaff, senior treasury officer, Netherlands Development Finance Co (FMO)

Willem Littel, senior manager, capital markets and investor relations, Bank Nederlandse Gemeenten

Tom Meuwissen, general manager, treasury, Nederlandse Waterschapsbank

Aldo Romani, deputy head of funding, euro, European Investment Bank

Mercedes Storch, senior funding officer and investor relations, Instituto de Crédito Oficial

Christopher Wigley, senior portfolio manager, Mirova

Craig McGlashan, moderator, GlobalCapital

: Could the issuers round the table give a quick breakdown of their SRI bond activity?

Mercedes Storch, Instituto de Crédito Oficial: We issued our first social bond three years ago for €1bn. At that point we committed to issue one social bond every year, with a benchmark size of €500m.

Björn Bergstrand, Kommuninvest: We issued our inaugural green bond, for $600m, in March 2016 and our second later that year for Skr5bn [$629m]. We hope to repeat that exercise this year. We’ve already issued one green bond for $500m and expect the second one to come in the second half of the year. We haven’t decided whether it will be a dollar or a krona and it’s also dependent on our green assets continuing to grow, but we expect it to happen.

Jürgen Köstner, KfW: This year we expect to issue €3.5bn-€4bn of green bonds, which is slightly more than last year. This corresponds to about 5% of our total funding programme of €75bn-€80bn. We expect our green bond volumes to stay around the same going forward. Volumes are largely determined by the asset side. We link renewable energy projects to our green bonds and the financings for the renewable energy projects are very stable.

Tom Meuwissen, Nederlandse Waterschapsbank: We issued our debut €500m five year green bond in 2014, a €1bn 10 year in 2015 and a $1.25bn deal in 2016.

This year we sold our first social housing bond, a dual tranche €1.5bn seven year and €500m 15 year affordable housing bond. In August we did a €600m 30 year affordable housing bond and we have issued two water bonds in Swedish kronor. 

I can imagine that we will issue another €500m water bond this year, which will take us beyond €3bn for 2017. That’s almost one third of our total annual funding target. 

We work closely with our clients in building the framework, presenting and explaining to investors and producing the reporting. That close co-operation with our clients is definitely an extra benefit for us in issuing SRI bonds.

Willem Littel, Bank Nederlandse Gemeenten: Just after 2014 we started our municipal best in class bonds, and last year we did our inaugural best in class housing bond. This year we expect to do €1bn-€1.5bn of both municipal and housing best in class bonds.

Arthur Leijgraaff, FMO: We printed our third sustainability bond in euros, for €500m, in May. We have committed ourselves to returning to the sustainable bond market on a regular basis. We have done three sustainability euro bonds in total, in 2013, 2015 and 2017. In addition, we printed one Swedish krona bond last year. The next transaction will depend on the asset growth and the market conditions. This year we will not issue another new sustainability bond — we might in the second half of next year or in 2019.

Aldo Romani, European Investment Bank: So far in 2017, we have issued roughly €4.2bn, about 52% of which was in euros. This includes our longest green bond thus far, which matures in 2047. This is a particularly important year for us because it is the 10th anniversary of the first green bond, which we launched in 2007.

: Could the market get to $100bn-equivalent of green bond issuance this year?

Arnold Fohler, DZ Bank: Our research team’s prediction is that we’ll go beyond the $100bn mark, to $120bn-$130bn. But that includes social bonds and whatever else falls under the ESG label. The figure alone is, however, not that relevant. The quality of what comes to the market, and the consistency, are to me more relevant for the future of this market segment.

Christopher Wigley, Mirova: Last year’s figure exceeded 2015’s volume by September 2016 and every year since 2012 we’ve exceeded the previous year’s issuance. 

In 2017 we exceeded the 2016 figure by July. We saw about $50bn issued last year — that’s a conservative figure that does not include Chinese green bonds, US municipals or bonds of less than $200m-equivalent. We’re already at $55bn this year, so 2017 will be the best ever year for green bonds.

Crispijn Kooijmans, Rabobank: According to the Climate Bonds Initiative numbers, we are close to $70bn at the moment. This means we need $8bn-$9bn per month for the last couple of active months of the year. This should be achievable, especially with a strong Chinese pipeline and some sovereigns that have stated that they will issue. 

Also, in recent years, the second half has seen more SRI issuance than the first. So, yes, we’ll probably get to the $100bn number, but I agree that that is not the most important aspect. Quality, credibility and diversification of issuers and products are more interesting.

Köstner, KfW: This year the market is growing but it is still very, very small — it’s just 0.2% of the total bond market. But what’s relevant is not just the increasing volume but also that there’s growth in the number of market participants. This is what we are looking for.

Hans Biemans, ING: We can probably get to $110bn this year if you count everything green, but we also have large social and sustainability bond issues that are not included in those figures. My expectation is that because of the creation of the Social Bond Principles we will see those bonds begin to be included in the overall numbers. 

Fohler, DZ Bank: The discussion shows that definition and norming are quite crucial. That’s typical and crucial for what is still a young market. You really have to come to a common understanding to ease its further development.

: Poland issued a green bond at the end of last year, then France followed suit early this year. Are sovereigns one kind of issuer that could boost overall growth?

Kooijmans, Rabobank: Definitely. Other sovereigns have already announced that they’re looking into it. The big question is which countries will actually take it up and what the quality and credibility of the programmes will be. 

A good thing about sovereigns entering the market is also that they are taking responsibility, showing that this is something they support. By issuing and committing they are setting the standards for the rest of the market. It’s leading by example.

We all agree that we need the other market participants to step up, and hopefully with sovereigns stepping in, others will follow.

Storch, Ico: Once a government gives commitment and support, the market is reinforced. Sovereign issuance is good progress but also sometimes governments can help by creating new incentives — for example, fiscal ones. 

Fohler, DZ Bank: If there is growth to come then it needs to come from the sovereign sector. It can also come from corporates, but volume-wise it should be sovereigns.

Bergstrand, Kommuninvest: There is an increasing realisation among governments that sovereign green bond issuance is one tool with which they can contribute to Article II of the Paris Agreement, regarding sustainable finance flows. 

In Sweden there is a government inquiry into green bonds and what type of measures the government can implement to boost that market. There is a specific mandate for the inquiry to look into sovereign green bond issuance.

It remains to be seen what proposals will come out of this inquiry but there is a lot of hope that it will recommend the sovereign to issue.

Wigley, Mirova: It was very good to see Poland being first, setting an example of what could be achieved and also setting an example for other issuers in Poland. France set a very good example as well, demonstrating what could be possible at scale and with the use of proceeds. We expect more sovereigns to come to market — it’s one way they can demonstrate their commitment to the Paris Agreement.

Romani, EIB: The status of the whole market has changed because increasingly people understand that green bonds are an instrument of public policy, not only in terms of volumes raised but also in terms of the transparency and accountability they create. Transparency and accountability are core aspects of public policy and the Paris Agreement. This recognition is also behind the establishment of the European Commission’s High Level Expert Group on Sustainable Finance. 

Biemans, ING: We are in a phase where investors and issuers are becoming more aware. That’s why it’s very helpful that sovereigns enter the market, and with large volumes. 

But it’s a good idea for sovereigns to, as much as possible, limit disbursements to the same or the previous calendar year of issuance. It should not become a political instrument that finances investments to be done far in the future.

Littel, BNG: We’re talking about these big volumes, but investors are looking at impact reporting. We have to see how sovereigns are going to cope with that, because the market will not grow individually. If the impact reporting is not done in a good way then this sector will also struggle.

Meuwissen, NWB: Don’t you think it’s a bit disruptive that government issuance can be so huge? Also for investors — it’s a part of their index and they need to buy it.

It could get so huge that there’s almost no need to look more closely for other, smaller green bonds. You can argue that most government expenses do qualify for SRI, anyway.

Wigley, Mirova: It’s possible for indices to be capped. France’s green bond is about 7% of an index; it’s the largest issue out there, but issues can be capped at, for example, 10% or whatever the index provider decides. So it doesn’t necessarily need to crowd out other issuers. 

Also, the impact reporting outlined by France is very sophisticated and it was another step forward in terms of impact reporting.

When we think about sovereigns we shouldn’t just consider Europe. Climate change is particularly acute in developing countries — for example, in Asia — and this is a prime opportunity for developing countries to issue green bonds to address the problems they’re facing. Investors will be very open to buying those green bonds if they come to the market.

: Would anyone welcome tax incentives or lower capital ratios for investors buying SRI bonds? 

Littel, BNG: It has been discussed already in Europe. At a high level working group in Luxembourg last June there were discussions about capital and tax relief. You need good stress testing because, typically, investments in sustainability or the green area are very long financing projects. Very long financing projects normally have big systemic risks that have to be addressed. Tax or capital relief could in the future create problems.

Tax incentives could be good, but there is the example of tax incentives in the Netherlands for electric cars that used to be very big up until a few years ago. Now, nobody is buying electric cars. I don’t think it’s a good reason for tax incentives if it means they are the only reason people invest in green or social bonds.

Kooijmans, Rabobank: I fully agree. It should be market-driven. Capital ratios are there for a reason so you shouldn’t disrupt the market by changing them. You can give tax incentives, but they are expensive, hence often only a short term stimulus. I would say it is better for governments to set best practices and provide liquid bonds to the SRI bond market, rather than interfere with tax incentives and capital.

Wigley, Mirova: On the investment side, the argument has always been that there should be no incentives because we need a level playing field. If there are incentives then how are pension funds treated? How are insurance companies treated? How are banks treated? If some receive special treatment it can distort the market. What’s important, and where I believe there is a consensus among issuers, is about lowering the cost of funds for those providing green projects.

Bergstrand, Kommuninvest: I fully support that. We are essentially a balance sheet lender and we don’t have direct control of the assets we finance. We are not in a position to put a green label on certain projects — we’re reliant on our clients choosing to finance their investment projects with green finance and they’re very price-sensitive. 

Even though we try to make reporting and disclosure requirements for clients as straightforward as possible, it’s still an additional burden for them to engage in green finance.

Measures to support the market should strive to address project owners. Try to look at things that can make material change on the ground — increasing investments in renewable energy, in green buildings, in various types of activities to meet the environmental targets and supporting green asset owners to become engaged in green finance. Then you get the project pipeline that enables issuers to come to market and fulfil demand from investors.

Biemans, ING: In the Netherlands we’ve had a fiscal green scheme since 1995. Retail investors get a tax deduction when they invest in retail green bonds and companies that borrow the money get a low interest rate. The lesson learned is that it works perfectly because it’s a very cheap way for the government to subsidise, as it only does so for innovations.

As soon as something becomes more mainstream then it would become too expensive for the Ministry of Finance. The government would then strengthen the rules. For example, for housing the rule is that a house can be financed with the fiscal green scheme if it is 30% more efficient than the last building directive, which in the Netherlands is quite strict.

This would not be sustainable with green bonds. So incentives can help with innovation but will be too expensive for mainstream transactions.

: The EU’s High Level Expert Group (HLEG) on Sustainable Finance published its interim report in July. What are your thoughts on its recommendations?

Romani, EIB: EIB participates in this group as an observer and technical adviser. We have been focusing specifically on one subject that is seen, along the lines of the G20 Green Finance Synthesis Report, as an important barrier to the development of the green bond market and more generally of sustainable finance, which is the absence of a shared classification of the underlying sustainable assets, starting with climate change.

We think this issue precedes that of creating European standards for green bonds, which was also mentioned in the report. The crucial issue is the development of a common terminology so that multiple international assessment standards (including the EU’s) can live together effectively and provide guidance to market participants, whose objectives and priorities may differ, in a transparent manner.

Without a common terminology the ability to compare issues does not exist. In this sense, the establishment of an EU standard should be understood as a clarification of what the EU considers relevant by reference to a common framework, so that everybody can act without misunderstandings. The market should then be left free to make its own decisions and develop further.

The interim report establishes a common basis for the discussion, which the EIB is feeding with its market experience. Multiple consultations are ongoing under our co-ordination and there will be a final report for the Commission at the end of the year. 

Wigley, Mirova: When the report was released there were some concerns that this might lead to more regulation in the green bond market. There were some who favoured that and some who were against it. 

But the HLEG is about more than green bonds — it’s about fiduciary duty, infrastructure investments, rating agencies and so on. The last thing anyone on the HLEG wants to do is slow the growth of the green bond market. They want to be constructive and this is just a first phase.

Bergstrand, Kommuninvest: It’s a very welcome report and a comprehensive set of recommendations that provides the framework for long term solutions. But we would like to see more measures addressing the shortage of supply in the green bond market. The report’s recommendations seem to be skewed towards demand side measures and not so much towards supply side measures that facilitate for project owners to come to market with green assets.

Biemans, ING: What I like about the report is that it also pays attention to credit ratings, corporate governance, indices and accounting standards. Especially in the green bond world, accounting standards will become much more important because there is a lot of debate in structuring green bonds — which parts of the budget of an issuer are actually eligible for green funding?

For banks it is relatively straightforward, because it’s just loans, but for many other issuers it is not straightforward at all. Can you include marketing expenses? Can you do staff expenses? It would help a lot of issuers if the definitions for the type of expenditures eligible for green funding were much more explicit.

: What are the latest developments in impact reporting?

Köstner, KfW: We have perspectives as both an issuer and investor in green bonds. As an investor, we have defined minimum criteria for our green bond investments. Frequent reporting, containing at least the environmental impact, is one of them. 

We analyse and compare the reporting on a very regular basis. Reporting by the various issuers still varies quite a lot in terms of detail and depth, although it’s not the case that smaller issuers have weaker reporting. 

But it’s difficult to compare metrics and assumptions. We are still far away from harmonised reporting. But the Harmonised Framework for Impact Reporting guidelines are excellent, so we encourage issuers to stick to that. 

As an issuer we stick to the Harmonised Framework in our reporting and get very positive feedback from investors. Our environmental impact is externally evaluated by an independent research institution — that distinguishes KfW quite a lot from many other issuers. Investors like that kind of reporting format. We’ve been rewarded for our transparency pre- and post-deal, so we feel encouraged to proceed with that approach.

Storch, Ico: There are big differences between green and social. Investors must be aware that there are differences when you are giving details about a small number of projects, compared with, say, 20,000 projects. You need to gather information in other ways. 

So this year we decided to sophisticate the way we report. Before, we provided all the information our SME debtors gave us. But now, with our research department, we have created another tool for reporting, which includes economic metrics and statistics, and national accounts information. We’re trying to provide more sophisticated reporting. It’s quite important for investors.

Meuwissen, NWB: The development is more and more towards quantitative reporting. We’ve issued water bonds since 2014 and the annual reporting is getting more and more quantitative each year. 

However, it’s easier to report on green than on social bonds. That is because the information on green tends to be more quantitative and on social more qualitative. CO2 reduction is easier to quantify than social wellbeing. 

This year we issued our first social bonds and we are working on the reporting framework. There is a lot of quantitative information available on social housing because it is a highly regulated sector. 

So, because we try to fill the need for standardisation, we are going to use the UN’s Sustainable Development Goals [SDGs] as the lead for our reporting. Of the 17 goals, we’ve selected eight that tick the boxes for our social bonds and we try to steer our reporting towards those.

Littel, BNG: We do sustainable bonds so we take into account every factor, including economics. We use a system that is completely quantitative, with indicators from official sources in the Netherlands. 

It goes less far in our social housing bonds, but with the municipal bonds it goes as far as waste management figures, water quality, pollution and even to risk management within the governance part. It’s a lot of work but investors like it.

Leijgraaff, FMO: We have joined the harmonised impact reporting framework. We have the resources in-house to comply with the required metrics. When talking to our clients, they are keen to start issuing green bonds as well, but reluctant for the operational implications. I know some clients who worked for more than a year on their first report on the use of proceeds. I always convey the message that reporting requirements should not be too complex in general, as that would not help other issuers to enter the market.

That really is crucial to grow the market, especially from emerging markets.

Bergstrand, Kommuninvest: I fully agree. The Harmonised Framework is a very good starting point for impact reporting and one we took a close look at when we faced the issue a little over a year ago. 

But it doesn’t answer all the questions you have as an issuer, and I realised we were probably not the only issuer in the Nordic countries facing the same delicate, detailed questions regarding impact reporting.

So in the Nordic countries we initiated a collaboration among public sector issuers that had or were planning to issue a green bond. We’re harmonising our impact reporting so that investors don’t find themselves in a position where eight Nordic issuers report in different ways. This has been very fruitful and we hope we can publish our results later on this autumn.

This is primarily to facilitate other issuers to come to market, but also to increase understanding among investors of what type of reporting they can expect from us.

There are no material differences from the Harmonised Framework, it’s just a clarification on a number of basic points, including the choice of a baseline. 

As an issuer you may face a choice between three or four possible baselines to use for electricity, for example. We have decided on one specific baseline. We also recommend reporting impact in relation to disbursed and outstanding amounts, as opposed to committed amounts. That’s just a few of a number of detailed recommendations.

Kooijmans, Rabobank: It will also help to grow the market if investors team up and are transparent on what kind of reporting they are looking for. We see that happening in the Netherlands, with a report by PGGM and APG, for which they teamed up to set out their Sustainable Development Investment taxonomies. That’s helpful to create clarity in the market. In the end it’s all about bringing investors and issuers together and making it work for both ends and keeping it credible. 

Romani, EIB: This is a very welcome development because when we brought together the International Financial Institutions group on green bond impact reporting harmonisation two years ago, finding the common ground needed to launch this first framework, the intention was indeed to establish a platform for further ad hoc discussions to take place. 

It was very clear from publication that different constituencies of borrowers should address issues that pertain to their own needs. 

Also, the framework only refers thus far to renewable energy and energy efficiency. There are other areas that need to be addressed systematically over time. The idea is that the green bond market is a very useful, process‑based venue that has established a communication platform among constituencies that used to work on their own without really co-operating. 

Markets can help create a very concrete approach. Comparability is in itself a core aspect, because it permits peer pressure, which is a fundamental motto of market development and also of incessant improvement in the underlying action — for example, against climate change.

Wigley, Mirova: Reporting is still developing. We’ve developed our carbon methodology but that’s not the whole story because green bonds also include water sustainability and other issues as well. 

There’s a lot of thought going into land sustainability metrics as well — that’s an area where we need more research. As Tom indicated, the whole concept of social metrics needs to be developed as well.

We’ve come a long way but there’s a lot more work needed. But we have to bear in mind, as mentioned earlier, that impact reporting should be kept as simple as possible, to enable issuers with smaller teams — perhaps the corporates — to complete impact reporting as well, without it being onerous. Because we need to encourage more corporates to issue green bonds.

: With the development of the Social Bond Principles, do you see the green and social markets diverging or will they be two parts of an overall SRI sector? Are any issuers considering entering the social bond market?


Storch, Ico: The first time we issued a social bond we explained to investors that we try to fulfil the use of proceeds as per the Green Bond Principles. But investors wanted a specific framework with clear rules. In this sense the Social Bond Principles have been a milestone for the development of social bonds. There are many similarities, so we shall remain close to green bonds, but maybe not under the same label, as there are differences in the reporting and use of proceeds.

Also, social bonds are growing, so it’s quite important to establish clear rules for investors.

Leijgraaff, FMO: We might consider a social or other thematic bond in future. Right now, the social bond market is where the green market was four years ago. It needs to mature over time. On the investor side, Mirova for instance has set up green bond funds, but we’re not there yet with social bonds.

Littel, BNG: It’s very difficult to label an investor — is he green, social, sustainable or mainstream? In the allocation process, that is the biggest discussion you have all the time. 

There’s a big distinction between a pure green investor and a sustainable investor, but if an investor is looking at sustainability in general it doesn’t make too much difference whether you do a green, social or sustainability bond. It’s the type of investor that is really important — and there are many types as well.

Fohler, DZ Bank: I don’t see the bottleneck in investor differentiation as yet. There is a higher complexity regarding social bonds and a much wider range of potential lending activities that can fall under the wider topic of social bonds. It needs to be explained in more detail. The reporting is more challenging. Only over time we might observe investor differentiation, i.e. that investors might run separate funds for just green, or social, or sustainability in general. 

But it’s good to have the Principles in place and to have issuers that have paved the way already. In five years’ time, this might all be settled down.

Meuwissen, NWB: Green is maybe more international and social more local. Investors might think with social bonds, ‘what’s in it for me?’ As a foreign investor, supporting the social situation in the Netherlands might be less tempting than supporting the environment. Carbon emissions from any country affect the rest of the world, for instance. 

However, I do think that in the end there is more potential for social bonds, more proceeds available than for green bonds. Social bonds is just in the starting phase.

Storch, Ico: Clean water in Spain can be important for Africa but less interesting for other regions, for instance. So yes, the local makes a difference.

Bergstrand, Kommuninvest: On the other hand, nations are increasingly facing the same types of social challenges, with youth employment, integration, increasing sick leave ratios, and so on.

This means there may be a case for an investor seeking to contribute to a development outside his or her domestic base that in the longer term may play back favourably to his or her base. It is a long shot, but SRI investors like to do good.

Biemans, ING: Aligning reporting with the SDGs is something we will see more often. The choice of themes among investors is now a bit chaotic. 

But investors will partly follow issuance. When the green bond market started, green bond fund mandates came in. I expect the same for social issuance, which potentially could be much bigger than green issuance. The definition of social must be stricter over time, but it is everything: education, social housing, healthcare and so on. It is immense. 

Wigley, Mirova: We have to understand that social and green bonds started around the same time. IFFIm sold its first vaccine bond in 2006 and EIB printed its first green bond in 2007. But the green bond market has grown exponentially — the social bond market more slowly. That’s perhaps because there’s more urgency behind green bonds. 

We have to also understand that green bonds have gone mainstream. There were some comments earlier about what investors want. SRI investors want green bonds and social bonds and sustainability bonds — the whole range. But at the moment it’s only green bonds that have gone beyond the SRI community. 

But at the same time, as Hans indicated, the potential for social bonds is immense. For millennials, climate change is their top priority. But within their top 10 are also education, employment and wellbeing. A wide range of projects are possible and social bonds can grow considerably.

Biemans, ING: BNG’s municipality bond included about 90 indicators for sustainable city development. Green investment in cities is extremely important, and BNG’s study showed that if you develop a city and focus only on green, then the city will suffer from all kinds of social issues — graffiti on the streets, waste collection problems, and so on. 

We need to understand that sustainable development is an integrated approach. But you can focus on only part of it to begin with, so it’s a good thing that we have separate Social and Green Bond Principles as we need to create the market that way. I wouldn’t be surprised if, at some point, it all comes together. 

: Are we starting to see spread differentials between SRI and conventional bonds?

Meuwissen, NWB: In the secondary market I don’t see it yet, but it’s definitely in the primary market. With an SRI bond you are a bit limited in size. 

If you do a benchmark and get a book of €3bn, you are able to raise to €2bn, for instance. But with an SRI bond you need to stick to €1bn, so that can lead to a tightening of the price during bookbuilding.

Even without that, you have more demand. On all our SRI issuance you end up with high quality books that were at least two times oversubscribed. Even after tightening pricing in the bookbuilding, in the two weeks after the launch of the deal, there’s always more tightening.

Storch, Ico: It’s not only in the execution you can feel the difference, but also in the diversification of investors you get, with new investors coming in.

Meuwissen, NWB: Because you have more investors — a lot more — that has an influence. And as a spin-off, you see those investors come into your normal bonds afterwards. 

Fohler, DZ Bank: We all experience that the secondary market performance of ESG bonds is doing extremely well. Thus, when it comes to pricing, us syndicate banks are much more confident to recommend spreads much closer to outstandings than in the early days of the green bond market, because you know that there is normally rock-solid demand out there. 

But one shall not forget that secondary market turnover is lower than in a conventional bond. A buy and hold attitude is much more present among ESG investors.

Kooijmans, Rabobank: SRI bonds open doors to investors, especially for some of the smaller issuers, for whom it can, for example, be difficult to organise a roadshow in specific regions. When you organise an SRI-focused roadshow, suddenly investors are willing to meet you and have the dialogue. That’s key. 

Also, before, you would just issue a bond and that was it, whereas now investors and issuers have a more in-depth discussion, because of the transparency involved. That’s really helpful.

Köstner, KfW: That’s also true for a very large issuer such as KfW. Since we started to issue green bonds three years ago, we have seen 70 investors in our books that we had never seen before. 

That changes the investor base a little bit. These 70 new investors are primarily asset managers and pension funds, while our conventional investors are mainly central banks and bank treasuries. 

On conventional bonds the share is about 15%-20% for asset managers, pension funds and insurance companies, and yet on our green bonds we have doubled the share of that group. This is attractive, because it was one of our aims with green bonds to increase our investor base.

But we haven’t seen that much difference on pricing, at least in primary.

Fohler, DZ Bank: There’s obviously a floor. It’s still the same credit risk. When it comes to the price it’s all about demand and supply dynamics. Therefore, you cannot ignore the normal bond curve of any issuer. But the performance of most of the bonds we’ve talked about has been very stable, so us syndicate bankers can become more relaxed about setting the price than beforehand, particularly for frequent ESG issuers, such as the ones around this table.

Wigley, Mirova: For investors, this is very important. We’ve always said it. The issuer of a green bond is often the issuer of a conventional bond — and if the credit risk is the same then the yield should be the same. We’re not buy-and-hold, but we are long term investors. They’re valued by issuers, particularly by corporates that have increased their number of investors by issuing green bonds. 

We have increasing interest in green bonds from our clients. So we need a secondary market where we can access bonds. We like to see issue sizes at least about €500m, so we’ve got that liquidity. 

But when it comes to buying in the secondary market we’ve always said, as the investor, that if we’re presented with the option of buying a conventional bond from an issuer with a high ESG rating and a green bond, and the yield is the same, we’ll go for the green bond every time. But we can’t pay a premium for that.

Romani, EIB: Eventually, green bonds could be equally or more liquid than other bonds, given the ongoing excess bid in the market. 

This year, we have seen very clearly an outperformance in the secondary market of our green bonds — CABs — versus our conventional bonds — Ecoops — with the same characteristics. 

What’s important is that we have been able to introduce the notion that we can take our green bond curve as a reference for new issue prices. The market is free to decide where that curve has to be, but we definitely witness that an increasing number of investors are happy to see a market-based reference showing that they are receiving bonds at a fair price. There are a number of investors for whom, if the green curve tells them that at a certain point the right price is better than the conventional curve, then they will buy. 

For example, when we priced our 2047 CAB before the summer, the green curve up to 2047 offered a pricing advantage of roughly 3bp. So pricing in line with the secondary conventional curve implicitly provided investors with a fair premium versus where the green curve was likely to end. That materialised — the 2047 has been trading a few basis points better than the comparable Ecoop. If you have sufficient green bonds in place to have a curve then you have a market-based pricing mechanism to use in discussions with investors.

Bergstrand, Kommuninvest: We did a similar analysis to KfW and discovered that approximately 50% of the 80 investors we have had in our green bonds were new ones, mainly asset managers and pension funds, adding to our traditional investor base of central banks and bank treasuries.

But we also found that certain investors who had not bought us for some time were coming back — and buying us in larger amounts than they had in the past. There was a perceived increased attraction in the bonds being green. It’s another advantage. 

Fohler, DZ Bank: Wouldn’t we unfold pricing dynamics, if sources of money could be labelled into, for example, dark green and light green? Where the former would be able to buy only bonds that have a use of proceeds according to the Principles, whereas the latter could also invest just on the basis of a strong company or institutional ESG rating? 

Would that be an effective way to have price differentiation? Or would that harm the development of the market or an investor’s business model?

Wigley, Mirova: There’s potentially interest in green bonds stretching from the US, particularly through Europe, and to Asia as well. The Paris Agreement of 2015 was a very positive event. A lot of nations signed up it. And then they went home, and they wondered how they could become more sustainable. That had a very positive impact, and we’ve seen a lot of increasing interest in green bonds. 

We do have a choice, but what’s important is that we see all the issuers — corporates, particularly — participating in a phenomenon that’s becoming more sustainable. 

Corporates are issuing their first green bonds ever. This is part of a process of energy transition across the world, from fossil fuel to renewable. Companies are adapting to the new environment and becoming more sustainable. 

Conceivably, it’s possible that there is a positive impact on the whole credit curve of issuers that are becoming more sustainable. There’s no research yet, but anecdotally there may be some evidence. Those companies that become more sustainable will be the companies of tomorrow. Companies that are left behind ultimately become a default risk, for us as investors.

Littel, BNG: Chris is right. We have implemented the whole sustainable structure in our internal business. That has led to more and more focus on financing more green projects — energy transition and so on. In that transition period, our issuance changes. At the end, the basis of the issuance is the loans we are providing.

Romani, EIB: This approach and the green bond approach are not mutually exclusive. In fact, it highlights that green bonds need to be put in perspective. 

If you are somebody that takes on an ESG strategy for the whole institution, you can focus a green bond on the areas that you already feel comfortable with and then build from there a coherent framework to green other areas over time. This has been recognised by the last version of the GBPs. 

One of the elemental strengths of green bonds is that it is the issuer who decides where to draw the line in terms of eligibility criteria. What is important is the transparency with which this dialogue with the market is established. You start with a project in mind, then work together under the supervision of the market towards improvements over time. 

Storch, Ico: You have the advantage of the transparency you can use in a second round of creating new assets. 

Also, SRI bonds are an important tool for European SSAs to explain what we’re doing. Given some of the concerns of the population we’ve mentioned, it’s important to explain why we are here, particularly with so many populist movements in Europe.

: Speaking of populist movements, how big a blow is Donald Trump’s decision to pull the US out of the Paris Agreement?

Kooijmans, Rabobank: Clearly, it’s a big shame that a country like the US has stepped out, where actually it should be leading by example. But on the positive side, corporates — for example, Apple — shortly after the decision to pull out, made a statement by issuing green bonds. 

Even more so, a lot of decisions with regard to sustainability are made not on the federal level, but on state and municipality levels. States like New York, California and Texas — which if independent would be among the richest countries in the world — have made statements about continuing to invest in sustainable energy.

Texas, for example, a state that is associated with oil, is responsible for 25% of the wind energy generated in the US, which comes down to the capacity of about 21 average sized nuclear power plants. 

People realise that you need to invest in sustainable energy to grow job numbers. It makes economic sense to invest in sustainable energy.

Romani, EIB: At the China-EU summit on June 2, the president of the European Council highlighted how China and the EU are close partners in the fight against climate change. 

In terms of practical work in the green bond market, we announced on March 22 a co-operation agreement with the People’s Bank of China, which aims to develop a shared conceptual framework and facilitate two-way capital flows. A first focus has been the mapping of China’s green bond endorsed project catalogue versus the policy objectives mentioned in the GBPs. This is also leading to effective comparisons of other existing classifications as well as the eligibility criteria used by different sectors.

The fight against climate change is a global challenge. One needs to recognise that there are different policy trajectories in different parts of the world. But if we have common language and a common framework, then our different work can be complementary and synergetic. 

Biemans, ING: Look at Exxon-Mobil’s last shareholders’ meeting. There was a proposal that Exxon-Mobil should be transparent about the impact of climate change risks on its business. The proposal was approved by the majority of the shareholders, some 62%, and led by a large shareholder. One year ago, that would not have been the case. A year before, the same proposal was backed by only 38% of the shareholders and thus rejected.

It is remarkable that large shareholders now support such proposals. That is the signal that we have passed beyond some sort of tipping point, where mainstream investors are becoming more aware of climate change, and are prepared to act. 

: Do issuers treat SRI and conventional investors — or dark green and light green — differently when allocating SRI bonds?

Biemans, ING: Traditionally, SRI investors were either thematic or very much based on the sustainability rating of the issuer as a whole. 

The important innovation of the green bond market is that we now look one level deeper. For a bank, that means a specific loan portfolio. For a corporate, it means, for example, factories. The big advantage of green and social bonds is a focus on impact, with investors requiring what impact their money has. 

Wigley, Mirova: Impact is becoming increasingly important. It’s also easier to do the impact analysis at the project level than at the company level.

But another positive spin-off of the green bond market on the mainstream market is that we’re finding that underwriting banks are stating in their term sheets the use of proceeds, even for non-green bonds and non-social bonds. They are saying it is for debt refinancing, or whatever. This is a very positive trend, in terms of transparency. This is the future.

Romani, EIB: Comparability of classifications is important here. We’ve been working on a ‘Rosetta Stone’ that permits a comparison between the taxonomies already used in the market by different constituencies. Our approach has been to clearly separate sectoral categories from policy objectives, and to determine the primary objective served by individual sectors. In this way, sectoral analysis and comparison can be performed in a more homogeneous way, objective by objective. 

An important purpose is to establish equivalencies between the sectoral categories of different taxonomies, which should permit us to forget about the nominal differences without asking people necessarily to change what they are already doing. 

If you take out the complexity linked to the difference in names, then you can focus on other aspects that are much more relevant, in practical terms. For example, is there sufficient granularity in describing sub-sectors? And within each, what are the eligibility criteria used by individual investors and lenders in those areas? More precise description of these aspects will enable better matching between supply and demand and also clearer distinctions among investors for allocation purposes. 

Fohler, DZ Bank: There’s an additional “threat” to the allocation topic that doesn’t come from ESG, but from MiFID II. MiFID requires us to be clear how we want to allocate and be transparent about that. Thus, we might face a situation where we need to justify ourselves. Assume a book that is heavily oversubscribed. Issuers and banks decide to focus on dark green investors first. So we need to come up with a definition of who is ultimately how green. Because other investors might ask, “why did I get a zero allotment? I consider myself green”. Or we might have a book that is not heavily oversubscribed, so we might be forced to allocate bonds to investors that are not green at all.

As an industry, we need to work on defining investors in certain clusters, and comply with what’s coming up on the regulatory side. It might even help this market segment develop further.

Meuwissen, NWB: During bookbuilding we ask questions of investors — whether they have a dedicated portfolio and so on. The idea is that you like to allocate more to the dedicated investors.

We have a lot of new investors in our SRI bonds, so it’s a bit of a luxury problem, but it can be a nightmare as well, especially when you have smaller investors. You’ve met them and you know they are green. But they might, for instance, be a bank, which might lead to them getting a smaller share. Investors can end up unhappy with you because of that.

Biemans, ING: We’ve allocated by classifying investors with the help of 10 indicators. So if you look into their UN PRI reporting, you will get a reasonably good view of the sophistication of a certain investor. Because they need to report the amount, the strategies, asset classes, specific funds, and so on. Then you can look at their SRI memberships — such as of the GBP and its committees, pledges such as IIGCC and so on. 

Fohler, DZ Bank: But you can only do that with larger investors. You cannot do that in a fragmented market where they are smaller independents.

Leijgraaff, FMO: We target SRI investors with our sustainability bond issues. Roadshowing helps to classify investors as dedicated green or non-green. During one-to-one meetings, you can assess whether an investor would qualify as dark green or light green.

Kooijmans, Rabobank: We have a database that helps us to classify investors for SRI bonds based on several subjective indicators as well, but the SRI angle does bring a new dimension to the allocation process. The greenness comes on top of other factors such as investor type. 

And that’s just green bonds — a green investor is not necessarily a social investor. It can get complicated. 

: Are any issuers privately placing SRI bonds or planning to do so?

Köstner, KfW: Our approach is to bring very large and liquid green bond transactions to the market. In May, we issued a €2bn green bond, the largest we’ve ever issued. It’s impossible to bring a bond of that size without conventional investors. Large deals are important for the market. SRI investors are already persuaded. But we also have to persuade the big pocket investors that do not have a green mandate yet.

But as investor demand drives our issuance, we are also able to do private placements. It’s of minor relevance, however — we’ve done two private placements so far, but we’ve done 10 large, public transactions. We try to bring each year at least one large dollar and one large euro green bond.

Littel, BNG: It also complicates impact reporting, as you have to do it for every single private placement. 

Storch, Ico: We haven’t ruled out the possibility of issuing maybe in other currencies, via public or private placements.

Leijgraaff, FMO: For now, we focus on public deals. FMO contributes directly and indirectly to the achievement of the SDGs. When new asset classes evolve under those on our balance sheet, we will explore whether to fund these with private placements.   

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